Q1 Polycorp is considering an investment in new plant of $3 million. The project will be financed with a loan of $2000000 which will be repaid over the next five years in equal annual end of year instalments at a rate if 9 percent pa. Assume straight-line depreciation over a five-year life and no taxes. The projects cash flows before loan repayments and interest are shown in the table below. Cost of capital is 15.5% pa (the required rate of return on the project). A salvage value of $200000 is expected at the end of year five and this salvage value is already included in the year five cash flows in the table below. Ignore taxes and inflation.YearYear OneYear TwoYear ThreeYear FourYear FiveCash Inflow900000950000850000950000950000You are required to calculate:The annual loan repaymentNPV of the projectthe IRR of the projectthe annual equivalent for the project(AE or EAV)the payback in years (to one decimal place)the accounting rate of return (gross)PI (present value index or profitability index)Is the project acceptable? Why or why not (provide a full explanation)?
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